The August economic bulletin: “Governments should withdraw support measures for the energy crisis that has disappeared. Inflation is decreasing but still too high”
”Future decisions by the Governing Council will ensure that key ECB interest rates are set at sufficiently restrictive levels for as long as necessary, in order to achieve a timely return of inflation to the 2 per cent objective over the medium term. The Governing Council will continue to follow an evidence-driven approach in determining the appropriate level and duration of restrictive guidance”. It indicates it the ECB in the August Economic Bulletin.
”In particular, interest rate decisions will continue to be based on the assessment of inflation prospects in the light of the most recent economic and financial data, underlying inflation dynamics and the intensity of monetary policy transmission”, continues the ECB.
”The Governing Council has also decided to set the remuneration of minimum reserves at 0 per cent. This decision will preserve the effectiveness of monetary policy, maintaining the current degree of control over the pitch of the latter and ensuring the complete transmission of rate decisions to the money markets. At the same time, the decision will improve the efficiency of monetary policy, reducing the total amount of interest to be paid on reserves, in order to implement the orientation adopted”, says the ECB.
The criteria for granting loans to households and businesses have further tightened, as banks have greater fears about the risks to which customers are exposed and are less willing to bear them. The more restrictive financing conditions also make the purchase of homes less accessible and less attractive as an investment and the demand for mortgages has dropped for the fifth consecutive quarter, therefore indicates the ECB.
”The rate increase reflects the Governing Council’s assessment of the inflation outlook, the dynamics of underlying inflation and the intensity of monetary policy transmission. The trends observed after the June 15 meeting confirm the expectation that inflation will further decline in the rest of 2023, but will remain above target for an extended period of time”, it reads.
”Although some measures are showing signs of easing, underlying inflation remains high overall. Past increases in interest rates continue to be vigorously transmitted: lending conditions have tightened again and are increasingly holding back demand, which is an important factor in bringing inflation back to target”, concludes the ECB.
“GOVERNMENTS TO REVOKE SUPPORT MEASURES FOR ENERGY CRISIS”
”As the energy crisis subsides, governments should promptly and concertedly withdraw the support measures adopted. This is essential to avoid pushing medium-term inflationary pressures upwards, which would otherwise require a more resolute monetary policy response”, warned the ECB.
”The Governing Council welcomes the Eurogroup statement of 13 July 2023 on the stance of fiscal policies in the euro area, which is consistent with this assessment. Fiscal policies should be formulated with the aim of increasing the productivity of the euro area economy and gradually reducing the high public debt. Policies aimed at improving the euro area’s supply capacity can help reduce price pressures in the medium term, while at the same time supporting the ecological transition, also promoted by the Next Generation EU programme. The reform of the EU’s economic governance framework should be completed by the end of 2023”, concludes the ECB.
“INFLATION DOWN BUT STILL TOO HIGH”
”Inflation continues to decrease, but it is still expected to remain too high for an extended period of time”, explains the ECB in the August Economic Bulletin.
”The Governing Council is determined to ensure the timely return of inflation to the 2% objective over the medium term. At the meeting of 27 July 2023, it therefore decided to raise the three reference interest rates of the ECB by 25 basis points”.
”The short-term economic outlook for the euro area has deteriorated, mainly due to weakening domestic demand. High inflation and more restrictive financing conditions are compressing spending”, indicates the ECB in the Bulletin.
”The product of the manufacturing sector is affected above all, also held back by weak foreign demand. Business investment and residential construction investment are also showing signs of weakness. Services continue to show more resilience, especially in contact-intensive sub-sectors, such as tourism. However, the services sector is losing momentum. The economy is expected to remain weak in the near term. Over time, the drop in inflation, the increase in incomes and the improvement in supply conditions should support the recovery”.
“EXTREMELY UNCERTAIN ECONOMIC OUTLOOK”
The outlook for economic growth and inflation remains highly uncertain. Downside risks to growth include Russia’s unjustified war against Ukraine and broader escalation of geopolitical tensions, risks that could fragment international trade and thus burden the euro area economy , underlines the ECB.
In addition, economic expansion could be slower if the effects of monetary policy are stronger than expected or if the global economy weakens, depressing demand for euro area exports. On the other hand, the expansion could turn out to be greater than expected if, thanks to the vivacity of the labor market, the increase in real incomes and the lesser uncertainty, citizens and businesses regain confidence and increase consumption.
Source-www.adnkronos.com